Optimism returns to China property market

Signs of recovery in China's property market send an optimistic signal for the economy in 2013. The WSJ's Tom Orlik explains what measures helped to spur this recent improvement in outlook.

And the best developed markets in 2013 may well be — are you sitting down? — in Europe, especially its toxic southern debt belt of Spain, Italy, and Greece.

I know that’s hard to believe, and I’ll go into more detail later. But first the easy stuff — emerging markets.

Emerging markets, Vardy told me, vastly outperformed the U.S. for much of the past decade. But when the financial crisis hit in 2008 they fell behind and took a nasty spill in the summer sell-off of 2011.

But though emerging-markets stocks trail their U.S. counterparts over the past few years, Vardy said there were signs of a reversal.

“The last three months it’s shifted [back,]” he told me. “Emerging markets and global markets in general have put in a very strong showing, and their outperformance has begun.”

Why? It’s simple: risk.

Global markets have rallied since the Federal Reserve announced its latest round of bond buying and, before that, European Central Bank president Mario Draghi vowed to do “whatever it takes” to backstop the debt of shaky European economies. It’s been one big “risk-on” trade ever since. Read more: ‘Global gorillas’ are new stock portfolio kings.

“Global stock markets are the ultimate ‘risk on’ asset,” Vardy wrote in a post on his website. “When the U.S. stock market does well, global markets tend to do even better.”

“Investment in [emerging markets especially] is driven more by risk appetite than by fundamentals,” he wrote. (Full disclosure: a family member invests in a fund Vardy runs.)

Beta, you bet

Over time, emerging markets have a “beta” (how much they move against U.S. stocks) of 1.3 to 1.6 times that of the Standard & Poor’s 500 Index
SPX, -0.23%
. So, should the S&P 500 rise 10%, emerging markets could gain as much as 16%. But they would fall harder than U.S. stocks in a downturn.

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